Debit cards are a form of smart cards. A smart card is a plastic card with an embedded microchip that allows its owner to use, among other things, the smart card as a substitute for cash in purchasing a wide variety of goods and services. Smart cards are well known and have enjoyed wide commercial success, particularly in Europe and Asia, and are now becoming well known and widely accepted in the United States. Smart cards typically conform to ISO Standard 7816-4 from the International Standards Organization (ISO) and include an embedded internal microprocessor or microcontroller. At present, smart cards used in the financial sector take three forms: (1) a re-loadable, prepaid debit card that can be purchased at a variety of stores; (2) a debit card associated with a checking account at a bank; and (3) a typical credit card issued by a bank or a banking institution such as Discover®, Visa®, or Mastercard®. Embodiments include debit cards using a magnetic strip, as well as versions with embedded printed circuits or embedded microchips.
One innovation of prepaid smart cards, or prepaid debit cards, is that they can be programmed to store a numerical value equaling the prepayment in cash by its owner and to deduct expenditures from the monetary value until the value is expended (i.e., zero balance is shown). The owner can then re-load or “top-up” the debit card by prepayment in cash and continue to use the same card. Thus, a prepaid debit card provides the convenience of a credit card, but does not require pre-qualification as to credit history, income, or the like. At any one time, a debit card can store a value of any monetary amount that has been credited to the user's card or user's checking account at a bank or banking institution. See The Non-Profit's Guide to Prepaid Cards, The Center for Financial Services Innovation, Chicago, Ill., September 2010. Further advantages of prepaid debit cards are that they eliminate the need to verify the ownership or the credit status and compliance of the user. A debit or credit card is typically activated by a personal PIN number to protect the owner from theft; thus, the particular smart card is of no value to anyone except the owner who possesses the PIN number. Other aspects of electronic cards, such as debit cards, are discussed in co-owned U.S. Pat. No. 6,014,648, entitled Electronic Card Valet, and U.S. patent application Ser. No. 13/049,479, entitled Multi-Use Electronic Card Balance Reader, both of which are hereby incorporated by reference in their entirety.
A debit card associated with a checking account at a bank allows the card owner the convenience of the use of an electronic card in his or her daily purchases. The amount of money available to the owner is the amount found in the debit card owner's checking account. This kind of debit card is helpful to the card owner in that he or she is only able to spend existing funds, and this reduces the chance of future indebtedness.
A further characteristic of the prepaid debit card is that, as with cash transactions, no individual record of types of purchase is identified, allowing for the privacy of one's own transactions. Of course, if the debit card is linked to a financial institution, such as a bank, the bank keeps records of each transaction for later use by the card holder. Thus, the debit card provides the privacy of cash, but the safety and convenience of credit cards. In many countries around the world, the smart card is a branded cash alternative for a wide range of goods and services, including telephone calls, highway tolls, retail store purchases, restaurant charges, taxicab charges, etc. In one sense, branded smart cards may be similar to prepaid debit cards, in the sense that the owner recognizes a limit to the utility of the card. However, if overcharges are allowed, the penalties or charges for going beyond the card limit may be onerous for many middle-class customers and especially for the unbanked, underbanked, or underserved users of such cards.
Unbanked individuals refers to individuals who conduct their financial lives entirely outside traditional banks and credit unions, while underbanked individuals are those who maintain a checking or savings account while also using alternative providers, such as payday loans. The credit needs of the unbanked and underbanked have been well documented. See, for example, How Should We Serve the Short-Term Credit Needs of Low-Income Consumers?, Melissa Koide and Rachel Schneider, Joint Center for Housing Studies, Harvard University, August 2010 (MF10-2). See also, Quick Credit: The Fringe Economy, the Great Recession, and the Welfare State, David Stoez, New America Foundation, Washington, D.C., August 2010, for a discussion of the unbanked and underbanked. Smart cards, such as prepaid debit cards, at least allow these populations to pay bills and transact business with means other than cash. These populations can least afford overcharges and may benefit from increased use of financial smart cards and the new financial regulations at the federal level.
In an example, a recent article from American Banker entitled Reaching the Underbanked? Try Offering Control, Research Says, noted that nearly 40 million American adults are underbanked and have difficult times in conducting basic financial activities such as paying bills. People who are underbanked tend to carry “wads of cash in their pockets and have to physically walk into a utility office to pay bills, into a store to pay off retail cards,” or into a telephone storefront to pay off a cell phone bill in cash. Citing Mark Schwanhausser of Javelin Strategy and Research, “It paints a picture of how difficult it must be to be underbanked. It's hard to understand what life would be like without a basic banking account. It's like oxygen. A prepaid card may be a different flow of oxygen. But you have to have some kind of financial building block in which to start building access to credit, one of the aspects of building a life.” To reach this goal, the underbanked need a “sense of control and oversight.” American Banker, Mar. 6, 2013, article is suggesting that prepaid debit cards may help. Article available at http://americanbanker.com/issues/178—45/reaching-the-underbanked-try-offering-control. The banking industry recognizes these issues in its attempt to reach a new banking market (the unbanked, the underbanked) while still placing maximum profitability as its priority.
Increased financial regulations were enacted during the recession of 2008-2010, such as the Credit Card Accountability, Responsibility and Disclosure (Credit CARD) Act of 2009, the Durbin Amendment to the Dodd-Frank Bill, and Regulation E. In addition, a new Consumer Financial Protection Bureau is underway, and is expected to result in at least minimal re-regulation of the banking industry. This means increased protection for consumers. At least one practical result is that banks are already searching for ways to alternatively maximize their revenues while complying with the new regulations. See Payment Card Issuer Strategies 2010: The Rise of the Cautious Consumer, Javelin Strategy and Research, Pleasanton, Calif., U.S.A. (publicly available excerpt). Some financial institutions even charge for calls to customer service. Eppicard Glitch causes delays for benefits recipients, Christian Science Monitor, Sep. 26, 2010, at http://www.csmonitor.com/layout/set/print/content/view/print/324206.
Sophisticated strategies from the banks may now focus on whether to allow overdrafts at all for their checking account, credit card, and debit card holders, and if so, how to comply with the new regulations and still continue to maintain a highly profitable revenue stream. For example, while credit cards have seen significant changes in the electronic card arena, prepaid, re-loadable debit cards do not appear to have been affected by the new regulations. To add to this, the popularity of such cards has grown dramatically, perhaps because they are easier to obtain and satisfactorily accommodate the day-to-day financial transaction needs of the average person. In fact, a 2011 IBOPE Zogby International survey found that consumers making everyday purchases use their debit cards 55% of the time, more than half the time. A Short History of the Debit Card, Jennifer Collins, marketplace.org, May 4, 2012, at http://www.marketplace.org/topics/business/news-brief/short-history-debit-card. From a financial institution's point of view, the debit cards are especially popular: Standard bank check processing and clearing fees are eliminated; there is no extension of credit; and the balance that is prepaid is available to the financial institution until presentment from a merchant or other creditor. The principal cloud on the horizon, or perhaps nearer than the horizon, is the new monthly fee charges sought by banks for debit card users.
As debit cards, especially pre-paid, re-loadable debit cards, become even more popular, consumers will want to make more use of them. For example, present debit cards typically include only an internal available balance, the amount of money remaining on a card that is available for the user to spend, and is knowable to the consumer only if he or she is doing business with a merchant whose receipt indicates a card balance, along with other particulars of the transaction.
The debit card would be more useful to the consumer if there were a way to use the debit card to establish and grow a savings account, i.e., a sum of money that remains on the card but is segregated and is not available for immediate spending by the user. A consumer and debit card user would benefit if there were a way to use the debit card to establish one or more savings accounts.